GM VEBA • As a solution to the unfunded liability, UAW and GM negotiated a Voluntary Employees Beneficiary Association (VEBA) contract. • The VEBA will allow GM to transfer about $50 Billion in retiree health care obligations to an independent trust managed by UAW.6

VEBA Contract Details • The VEBA will administer retiree health care benefits • GM will initially pay $29.9 billion into VEBA • Includes $4.37 billion GM convertible note7 • Healthcare co-payments limited to not more than 3%/yr increase through 2015 and after might increase 4%/yr • Active workers will see diversions in wage increases to help fund VEBA8 • GM will pay $1.6 billion/year over 20 years • As long as VEBA is anticipated to remain solvent9

What is a VEBA? • VEBA is a tax-exempt trust whose funds are used to pay eligible medical expenses.10 • It exists to provide for the payment of life, sick, accident or other benefits to association members or their dependents. • VEBA is a statutory creation found in IRS Code Section 501(c)(9)11

VEBA legal criteria • 26 CFR Sec. 1.501(c)(9) describes criteria that must be met to qualify for VEBA tax-exempt status: • a) Organization is employees association • b) Membership is voluntary • c) Organization provides for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits • d) No part of the net earnings of the organization inures, other than by payment of the benefits referred to in paragraph (c) of this section, to the benefit of any private shareholder or individual.

VEBA upsides • UAW • VEBA takes away uncertainty associated with GM bankruptcy • Before, if GM went bankrupt, retiree union workers would get nothing. Now they at least have the funded VEBA.

VEBA downsides • UAW • UAW is new to health care financing business • VEBAs have failed before and many predict its downfall13 • All responsibility is now on UAW shoulders to provide retiree healthcare in face of rising costs14 • Plan starts off under-funded (at 70%) • money will have to grow to cover costs (difficult).

VEBA downsides • GM • Minimal since it is transferring all the liability to UAW/VEBA15 • possible lawsuits if it fails?

VEBA history and concerns • Traditional VEBAs date back to 192816 • VEBAs typically used by large unionized companies • New twist is that VEBA is being used recently as a vehicle to transfer management of liabilities to unions • Other automakers are taking GMs lead in adopting VEBA strategy (Ford, Chrysler)17

VEBA history and concerns • Successful VEBAs • Navistar VEBA set up in 1992 is still going strong • Goodyear and United Steelworkers of America recently set up VEBAs

Rising Healthcare costs • United States health care costs are expensive and rising • US spent over $2.3 trillion on health care in 200719 • 16% of GDP • Approximately $7,500 per person20 • Japan: average of $1,759 per person, but with 4.5 years longer life expectancy21

Rising Healthcare costsEmployee expenses • Employers are shifting health care costs onto employees. • Share of health premium was 14% in 1992 and 22.1% in 200522 • Combined with the rapid growth in overall premiums means workers are paying much more than they used to. • Average cost charged to employer for insurance for family of four is $12,100 in 2007 • Workers contribute $3,300 of that, or 10% more than in 2006.

US Insured vs. uninsured • There is a correlation between high health care costs and uninsured citizens. • In 2005, the census showed 15.3 percent of the population (44.8 million) did not have insurance24

Massachusetts health care reform • It is important, because outcome could help decide how to handle national health care. • The plan is expected to cost $1.2 Billion over three years • New funding will come from employer contributions and General Fund revenues • There is concern this is not enough money and could face gap of $147 million this year28 • Because so many are signing up for subsidized care, costs are projected to skyrocket $400 million in 200929 • However, although Romney touts it as a success from his time as governor, it is still too early to tell. • Plan went into effect July 1, 200730